Present-biased preferences engender a demand for commitment. Commitment is a problematic prediction, since we see so little of it. I quantitatively explore the reasons for the “missing” commitment. Extending the procrastination model in Carroll et al. (2009), I show how equilibrium commitment is related to (i) the standard deviation of the opportunity cost of time, (ii) the cost of delay, (iii) the degree of partial naivete, and (iv) the direct cost of commitment. The calibrated model demonstrates that the perceived benefits of commitment are often overwhelmed by the costs of commitment. Demand for commitment is a special case rather than the general case.

Cognition requires scarce inputs, including time and concentration. Since cognition is costly, sophisticated decision-makers should use mental shortcuts, or heuristics, to reduce cognitive burdens. A model is proposed and tested that is motivated by these principles. It is believed this model achieves four goals. First, the model makes quantitative behavioral predictions and, hence, provides a precise alternative to the rational-actor hypothesis. Second, the model is psychologically plausible because it is based on the actual decisions algorithms that subjects claim to use. Third, the model is empirically testable; such a test is provided in this paper. Fourth, the model is broadly applicable, because it can be used to analyze decision problems that can be represented in tree form.

We study the effect of monetary and fiscal policy in a heterogeneous-agent model where households have present-biased time preferences and naive beliefs. The model features a liquid asset and illiquid home equity, which households can use as collateral for borrowing. Because present bias substantially increases households’ marginal propensity to consume (MPC), present bias increases the effect of fiscal policy. Present bias also amplifies the effect of monetary policy, but at the same time, slows down the speed of monetary transmission. Interest rate cuts incentivize households to conduct cash-out refinances, which become targeted liquidity injections to high-MPC households. Present bias also introduces a motive for households to procrastinate refinancing their mortgages, which slows down the speed with which this monetary channel operates.

[We evaluate why individuals invest in high-fee index funds. In our experiments, subjects each allocate $ 10,000 across four S&P 500 index funds and are rewarded for their portfolio's subsequent return. Subjects overwhelmingly fail to minimize fees. We reject the hypothesis that subjects buy high-fee index funds because of bundled nonportfolio services. Search costs for fees matter, but even when we eliminate these costs, fees are not minimized.Instead, subjects place high weight on annualized returns since inception. Fees paid decrease with financial literacy. Interestingly, subjects who choose high-fee funds sense they are making a mistake.]

Extending Barro (

Laboratory and field studies of time preference find that discount rates are much greater in the short-run than in the long-run. Hyperbolic discount functions capture this property. This paper solves the decision problem of a hyperbolic consumer who faces stochastic income and a borrowing constraint. The paper uses the bounded variation calculus to derive the Hyperbolic Euler Relation, a natural generalization of the standard Exponential Euler Relation. The Hyperbolic Euler Relation implies that consumers act as if they have endogenous rates of time preference that rise and fall with the future marginal propensity to consume (e.g., discount rates that endogenously range from 5% to 41% for the example discussed in the paper).

Many experiments have found that participants take more investment risk if they see less frequent returns, portfolio-level returns (rather than each individual asset's returns), or long-horizon (rather than one-year) historical return distributions. In contrast, we find that such information aggregation treatments do not affect total equity investment when we make the investment environment more realistic than in prior experiments. Previously documented aggregation effects are not robust to changes in the risky asset's return distribution or to the introduction of a multiday delay between portfolio choice and return realizations.

Behavioral economics has become an important and integrated component of modern economics. Behavioral economists embrace the core principles of economics—optimization and equilibrium—and seek to develop and extend those ideas to make them more empirically accurate. Behavioral models assume that economic actors try to pick the best feasible option and those actors sometimes make mistakes. Behavioral ideas should be incorporated throughout the first-year undergraduate course. Instructors should also considering allocating a lecture (or more) to a focused discussion of behavioral concepts. We describe our approach to such a lecture, highlighting six modular principles and empirical examples that support them.

We show that individual investors over-extrapolate from their personal experience when making savings decisions. Investors who experience particularly rewarding outcomes from 401(k) saving—a high average and/or low variance return—increase their 401(k) savings rate more than investors who have less rewarding experiences. This finding is not driven by aggregate time-series shocks, income effects, rational learning about investing skill, investor fixed effects, or time-varying investor-level heterogeneity that is correlated with portfolio allocations to stock, bond, and cash asset classes. We discuss implications for the equity premium puzzle and interventions aimed at improving household financial outcomes.

We combine two experiments and a survey to measure trust and trustworthiness—two key components of social capital. Standard attitudinal survey questions about trust predict trustworthy behavior in our experiments much better than they predict trusting behavior. Trusting behavior in the experiments is predicted by past trusting behavior outside of the experiments. When individuals are closer socially, both trust and trustworthiness rise. Trustworthiness declines when partners are of different races or nationalities. High status individuals are able to elicit more trustworthiness in others.